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Ignite Restaurant Group, Inc. (NASDAQ:IRG)

Q4 2013 Earnings Conference Call

March 4, 2014 5:00 PM ET

Executives

Michael Dixon – President and CFO

Ray Blanchette – CEO

Analysts

Nicole Miller – Piper Jaffray

Jonathan Komp – Robert W. Baird

Keith Siegner – UBS

Chris O’Cull – KeyBanc

Operator

Good afternoon, and welcome to the Ignite Restaurant Group Fourth Quarter 2013 Earnings Conference Call. Today’s call is being recorded. A replay will be available starting today for those who cannot attend this live event.

Before I turn the call over to management, I would like to note for you that portions of this call deals with forward-looking information. These statements reflect management’s expectations for the future. The company’s actual results may differ materially from these expectations. Management refers you to today’s press release and the company’s recent filings with the SEC for a more detailed discussion of the risks that could impact the future operations and the company’s financial conditions.

During this conference, management will also be presenting non-GAAP financial information. Information concerning non-GAAP financial information appears in the company’s earnings press release for the quarter and related current report on Form 8-K filed earlier today with SEC.

On the call today, we have Ray Blanchette, Chief Executive Officer of the company; and Michael Dixon, President and Chief Financial Officer.

At this time, I would like to turn the call over to Michael Dixon. Please go ahead, sir.

Michael Dixon

Thank you, operator. Good afternoon and thank you for joining us today. By now, everyone should have access to our press release, which we issued this afternoon. The release which covers our fourth quarter and fiscal 2013 can also be found on our website under the Investor Relations section. Additionally, I would encourage everyone to review our related 8-K filed with the SEC for greater detail on the information included in our press release and on today’s conference call.

Our agenda for the call will be as follows. Ray will provide an overview of our business, and then I will discuss the financial results. We will have time at the end for questions, but we’d like to finish up in about 45 minutes. Before I turn the call over to Ray, let me once again remind investors of the change in our fiscal quarter calendar.

Beginning with the first quarter of fiscal 2013, we adjusted our quarterly reporting calendar to four 13-week operating periods. Previously, the first three quarters of our fiscal year consisted of 12 weeks and the fourth quarter consisted of 16 weeks. As a result of this change, financial results for the 13-week quarter ended December 30, 2013 will now be directly comparable to those of the corresponding 16-week quarter ended December 31, 2012. We’ll point out the impact of this as we go through the numbers for the quarter.

Now, I’d like to turn the call over to Ray Blanchette, our Chief Executive Officer.

Ray Blanchette

Thanks, Mike, and thanks everyone for joining us today. Let me start by formally welcoming John Gilbert to the Ignite Management team. As we announced yesterday, John will assume the role of President of Macaroni Grill. Very, very fortunate to benefit from John’s insight in brand building skills. For over five years, he is member of our board of directors. I consider getting him back onto the Ignite team a real coup. Most recently, John was CEO of Famous Dave’s. He has a long and successful history in the restaurant industry, including leading the marketing teams at Dunkin’, at Yum! and TGI Friday’s.

In addition, I expect that John’s knowledge, skills and experience would be an excellent resource to all of the Ignite brands. John is an outstanding individual. We believe that his proven marketing strength, determined focus on driving profitability will serve our shareholders as well.

As we finish our first fiscal year with Macaroni Grill and Ignite Restaurant portfolio, I believe we’ve positioned this brand for revenue and margin growth. In the fourth quarter Romano’s Macaroni Grill comp sales came in at negative 9%. While this is not exciting, we continue to make progress with our margin management at these lower sales volumes.

As the winter weather clears and the impact of aggressive discounting, prior to our stewardship lanes, we believe we’re better positioned to reap the benefits of the increasing sales.

Under David Catalano’s leadership, we’ve strengthened our management leadership, improved our unit level margin management, and confident that John will build upon this and take Mac Grill back to its leadership position in casual dining landscape. As we also announced yesterday, David has taken the reins at Brick House, our next-generation bar and grill. His operational expertise and field leadership skills are ideal for this brand and its enormous growth potential. I’m confident that both of these leaders will continue to create real shareholder value in their new positions at Ignite.

Our legacy brands, Joe’s and Brick House continued to perform well. Joe’s Crab Shack posted solid comparable store sales of 1.9% during the fourth quarter, outperforming the 1.8% decrease reported by KNAPP-TRACK for casual dining by 3.7%. Joe’s has now shown positive annual comps for six consecutive years. The 100% Shore brand positioning is clearly resonating with our guests, and nearly every retail and restaurant company has pointed out, the severe winter weather had a material impact on fourth quarter results.

With the impact continuing into the first quarter of 2014, our large patios and surfside décor, Joe’s has historically had more volatility driven by weather, both positive and negative than most other concepts. I’m therefore that much more impressed by Joe’s nearly 4 point out-performance to KNAPP in the quarter.

Brick House Tavern + Tap comps were even better than Joe’s with a 6.6% increase in comparable unit sales. Our menu innovation, food, quality service and atmosphere, all working together, allowing Brick House to capture market share from traditional casual dining options. As I discussed, volatility due to weather with Joe’s, it seems fair to point out that at least this year, Brick House seems relatively immune to a drop in the mercury. I’m not certain if it’s the warmth of the fireplaces, the next generation comfort food or the whiskey winter punch, but so far, the little cold weather has not persuaded the Brick House customer.

As anyone who has followed our story knows, Brick House was initially developed as a real estate management option, clearly grown into something much more powerful than that, but it continues to excel at its original mission and turning underperforming restaurant sites into strong cash generators.

In the fourth quarter, we successfully opened four new four Brick House units. Three conversions, two of them from Mac Grill’s and one from Joe’s and one completely new site. In 2014, Brick House will be exclusively focused on optimizing the real estate we already control. Until we see a marketing increase in Mac Grill sales, we have the mixed blessing of a target-rich environment.

I think it’s worth pointing out in the relatively short time that we’ve owned Mac Grill, we already converted two locations to Brick Houses. Both of these locations saw average weekly sales increases from the Mac Grill days to the Brick House days of over 100%. We will continue to capitalize on these opportunities as cash flow allows.

Converting underperforming units is not the only strategic option available to us, because of the high quality of the real estate, we’ve also received considerable outside interest in acquire leasehold rights. Clearly, we did not acquire Mac Grill to solve real estate problems for other retailers and restaurants. However, as we continue to look for opportunities and maximize the value of Ignite through real estate optimization, strategic sales of underperforming leases would likely become a viable alternative.

So shifting gears, a few years ago – I’m sorry, few weeks ago, we gathered all of our general managers and major vendors in Las Vegas for our Annual GM Conference. We had nearly 800 leaders and stakeholders in attendance, and it was great to get a chance to set expectations, share best practices across concepts. There are two takeaways from this conference that I want to share with everyone on the call. First, we announced our General Manager I LEAD plan.

That’s going to award all of our general managers a thousand shares of Ignite restricted stock with a three and five year vesting period. This is a really important step in the development of the Ignite culture and our ability to attract and retain quality general managers that we need to be successful.

Second, I reiterated our primary areas of focus. I’ve mentioned these before, but I believe they are worth saying again. Number one, while profitable at the restaurant level in the quarter, Mac Grill still has ways to go to be accretive to Ignite’s earnings, continue our passionate focus, expanding both same restaurant sales and of course margins.

Number two, the success and potential to Brick House business allows us to continue solid growth. We’re doing this by maximizing the quality real estate we already control through conversion of underperforming locations within our portfolio.

Number three, the Joe’s business continues to be a solid performer, not accounting the current weather impact. We’ll continue to grow this brand in disciplined manner that focuses on the types of locations that have proven successful in the past. In addition, we’ll continue to experiment with our remodeling program to identify a scope of work that makes sense for a nationwide rollout.

And number four, we’re leveraging the franchise infrastructure acquired in the Mac Grill transaction, building a powerful growth engine that we think can pay dividend in the years to come.

So I’m excited about the future and the progress made in all three brands. I think we still have some real work to do to getting that income up where we believe it should be, but we’re making progress and I expect the wait will be worth it.

So with that, let me turn it over to Mike to walk you through the financials. Mike?

Michael Dixon

Thanks, Ray. I mentioned earlier the change in calendar quarters to a 13-week quarter from a 16-week quarter. We’re going to give revenue results on a comparable 13-week basis. However, the expense side of the equation is not directly comparable.

For the fourth quarter ended December 30, 2013, we posted total revenues of $186.9 million. This is a $97.9 million or 110% increase over the comparable 13-week period of the prior year, due primarily to $88.3 million associated with Macaroni Grill, and 1.9% increase in comparable restaurant sales at Joe’s and a 6.6% increase at Brick House.

Sales at Joe’s increased $6.2 million to $83.6 million versus $77.4 million in the comparable period of the prior year. This increase is driven by the previously mentioned 1.9% increase in comparable restaurant sales and additional operating weeks from new store openings, partially offset by the honeymoon effect related to restaurants opened more than a year but not yet in the comparable restaurant store base. The comparable sales increase at Joe’s reflects a 0.7% increase in pricing, a 1.4% increase in mix and a 0.2% decrease in guest count.

The sales volumes of the newer units continue to be strong, with trailing 12-month average unit volumes at $4.2 million for the restaurants in the class of 2011 and a $4.55 million average for the units in the class of 2012 that are opened at least one year. We believe these units will settle in at or above our $4 million AUV goal and well above our system average of $3.2 million.

At Brick House, revenues increased $3.5 million in the fourth quarter of 2013 to $15 million versus $11.5 million in the comparable 13 weeks of the prior year. This increase reflects a 6.6% increase in comparable store sales and the addition of five new locations, partially offset by one location that was closed for conversion to a Joe’s Crab Shack in last year’s fourth quarter. Comparable sales increase at Brick House was comprised of a 3.4% benefit from price and a 3.2% benefit from traffic and mix.

We opened four new Brick House Tavern + Tap units in the quarter. One was a conversion from the Joe’s and two were conversions from Mac Grill. We also closed three Mac Grills in the quarter that were at or near their lease expiration.

Romano’s Macaroni Grill sales were $88.3 million, which included $861,000 in royalty income. Comparable restaurant sales at Mac Grill decreased 9% comprising 11% decrease in guest count, partially offset by 0.4% increase in price and 1.6% increase in mix benefit.

For the first two months of 2014’s first quarter, sales at both Joe’s and Mac Grill have faced significant weather-related headwinds with negative comps in the mid to high single-digits. Brick House is faring considerably better with strong positive comps, but unfortunately that’s material because of its relatively lower store count.

Let’s shift to the margin side. Costs of sales for the quarter decreased to 29.6% of revenues versus 31.1% in the prior year, due primarily to the inclusion of the Mac Grill business and some favorable crab and lobster costs versus the prior year. We did feel some pressure from shrimp costs moving in the wrong direction, but shrimp represents only about 5% of our total food purchases.

Labor for the quarter increased to 32.1% of revenues versus the prior year’s 30.1%. This largely reflects the impact of the Mac Grill business. We’ve made significant improvements in this area since the end of Q2 and we’ll continue to fine-tune labor moving forward. But with the low Mac Grill AUVs, we will continue to target increase unit level sales as a key driver of improvement.

Occupancy expenses for the quarter increased to 10.3% of revenues in 2013 versus the 9.3% in 2012, again due primarily to deleveraging for Mac Grill’s lower average volume across its 189 [ph] units. Other operating expenses increased to 22.2% of revenues from 18.6%, also as a result of Mac Grill deleveraging.

G&A decreased to 6.3% of revenue in the fourth quarter from 9% in the prior year. Now adjusting for the restatement and other non-recurring costs in 2012, adjusted G&A as a percentage of revenues, decreased to 6.3% from 7.8% in the prior year. At this point we believe we have realized the expected G&A synergies from the Mac Grill transaction taking out over $7 million of annual spend from the combined companies.

For the full year 2013, after adjusting G&A for one-time acquisition costs, secondary offering charges and other non-recurring expenses, G&A expense as a percent of revenues was about 6%, right about where we expected it to be. However, with the current negative sales results in Mac Grill, we will continue to review all aspects of the G&A structure for additional savings.

Depreciation and amortization costs as a percentage of revenues decreased to 4.2% in 2013 from 5.3% in the prior year, primarily as a result of adding Mac Grill locations with a lower average asset base combined with their seasonally higher revenue in the fourth quarter. Pre-opening expenses for the quarter increased to $0.8 million from $0.4 million in the prior year. We opened four units in Q4 2013 versus one unit in Q4 2012. We also incurred pre-opening costs in both quarters for store openings in progress.

As I mentioned last quarter, our SEC filings now reports segment data by brand, including the income from operations. Please note that income from operations includes the restaurant operating costs and expenses, directly allocable G&A, depreciation and amortization and other income and expense items directly associated with the brand.

The operating margin for the Joe’s brand was 0.7% for the current quarter compared to 2.3% in the prior year. Most of this decline relates to a larger impact from allocated G&A cost as a result of seasonality-related deleverage with the change in comparable weeks from 16 to 13.

At Brick House, operating margins increased to 1% from 0.8% in the prior year. Now relative to Joe’s, Brick House margins were impacted by slightly higher direct G&A costs, as we prepared the brand for rapid growth; higher depreciation costs, as these are all relatively new units; and higher occupancy costs, due to the mix of real estate and more current leases.

On a year-over-year basis, the slight margin improvement is due to the improved restaurant and G&A margins from the comp sales increase, partially offset by $700,000 in pre-opening costs from our four new restaurant openings compared to none in the prior year fourth quarter.

Macaroni Grill delivered a loss from operations of $3.9 million or an operating margin of negative 4.4%. While still negative, this was a significant improvement from the $10.2 million loss in the third quarter. We realized positive restaurant level profits in Mac Grill, but not enough to cover the allocated G&A depreciation charges. In addition, we recognized about $1.1 million related to discontinued operations and impairment charges.

Interest expense decreased to $1.8 million in 2013 from $3.4 million in 2012. This decrease is related to $2.2 million in refinance costs recognized in 2012, partially offset by increased interest associated with the higher average debt balance and higher rates in 2013.

Finally, our effective income tax rate for the quarter was a 66.4% benefit versus an expense of 27.1% in the prior year. The 2013 tax rate as a result of our loss in the quarter coupled with the additional benefits from the FICA Tip Credit received from Mac Grill.

Debt outstanding was $132 million at year-end. We are in compliance with the debt covenants at year-end.

Okay, let’s shift gears to what we expect for 2014. On the development front, we expect to open as many as three new Joe’s location. All three of these will be in the Northeast, and all three of these openings will be in or about the third quarter. We also expect to open as many as five Brick Houses. As Ray mentioned, these will all be conversions of existing Mac Grill locations. If we can, we’d like to fit a Mac Grill conversion to Joe’s in the mix as well.

We’ve closed seven underperforming Mac Grill locations since our acquisition last April. As Ray mentioned, two of these were converted to Brick Houses. As we continue to maximize the real estate portfolio, we expect to close or sell the lease rights to several more locations in 2014.

2014 has obviously got up to a rough start from the weather, however for the full year we are projecting IRG comp sales of flat to a positive 1.5%. That’s comprised of Joe’s at about 0.5% to 2% increase, Mac Grill at negative 2% to flat, and Brick House around 2% to 4% positive. Full year revenues are projected to be in the $860 million to $890 million range. This includes about an $85 million to $95 million increase from first quarter of Mac Grill sales, as we did not owned Mac Grill in the first quarter of 2013.

Overall margins will continue to be challenging to forecast in the near-term due to the volatility in the Mac Grill comp sales. However, we believe we’ve progressed enough on our margin management to give some guidance.

We expect combined restaurant level profits to be in the 10.5% to 12.5% range for the full year. Overall G&A expenses should be in the $49 million to $52 million range. Depreciation expense is planned at approximately 3.9% and pre-opening should be around $3 million.

As I mentioned earlier, we’ve withdrawn $132 million on our credit facility at year-end. Net of letters of credit supported by the facility and term loan amortization, about $10 million of the facility was available at the year-end. As of today, we’ve drawn about $128 million with $12.5 million available, again net of letters of credit.

We believe we have sufficient capital to meet our objectives for 2013. We expect interest expense in 2014 of about $6 million. As we discussed last quarter, we amended our credit facility to give us flexibility to manage and grow the business as we see fit. We are in compliance with the amended covenants at year-end and we expect to remain in compliance for the foreseeable future.

Effective income tax rate should actually be about 30% benefit for 2014, due primarily to the impact of the FICA Tip Credit. Now, this will have an interesting effect on our quarterly results throughout the year, as it will reflect the tax benefit in quarters with positive EBT and a tax expense in quarters with the negative EBT.

And before I turn it back over to Ray, I want to second Ray’s comments about our excitement to have John Gilbert join our team and David’s movement over to the Brick House. There is still lot of uncertainty around top line performance from the weather and other factors, especially around Mac Grill, but these management changes give us more confidence and a stronger leadership team as we move forward.

With that, I’ll turn it back over to Ray. Ray?

Ray Blanchette

Thanks, Mike. To wrap this up, we continue to extend the solid track record of success at Joe’s. In Brick House is successfully taking market share from the more established casual dining brands. The long-term investment thesis with Mac Grill is beginning to gain traction, but it will take some time to bear fruit.

So with that, at this time let’s open up the call to some questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Nicole Miller with Piper Jaffray.

Ray Blanchette

Hi Nicole.

Nicole Miller – Piper Jaffray

Thanks. Good afternoon. I wanted to understand the commentary about the leasing options of the Mac Grill in retail and restaurants potentially coming to you. Does that – if I understand that right, does that mean you would franchise it out to them? So it’s like a franchising and re-branding effort, or can you clarify that for me?

Ray Blanchette

Sure, I will clarify. Now let’s just – other retailers, folks that want to use that real estate are looking to assume the lease takeover for their brands.

Nicole Miller – Piper Jaffray

Okay. So franchising would be a separate – I mean you didn’t really touch on that today. So where does franchising of really Mac Grill, but all the brands come into play?

Ray Blanchette

Yes. In my commentary I mentioned as number four, I think it was.

Nicole Miller – Piper Jaffray

Okay.

Ray Blanchette

The strategic priorities. Yes, franchising – leveraging the franchise infrastructure that we’ve bought with Mac Grill is still one of the strategic priorities of the company.

Nicole Miller – Piper Jaffray

Will any franchise stores be opening this year?

Ray Blanchette

Well, there’ll be four franchise stores opened internationally on the Macaroni Grill’s. And then domestically possible, but I don’t know if we’ll have one opened in 2014 or not.

Michael Dixon

We’ll have agreements on Nicole, but probably not new units just yet, just because of the lead times.

Nicole Miller – Piper Jaffray

That makes sense. So an agreement to be signed with stores to open the following year?

Michael Dixon

Right.

Nicole Miller – Piper Jaffray

Okay. Thanks for going through with me. And then on the performance of the new Joe’s. Obviously the AUVs are above the system average. Is this a function of better real estate, or is there something doing – you’re doing from an operational perspective and seeing most of the honeymoon impact in there for keeping more of the sales over time?

Ray Blanchette

I think it’s really – it goes back to the development strategy that we’ve put in place several years ago when we first started opening Joe’s. We really narrowly defined development corridor, if you will. The way we identified where we wanted to build new Joe’s Crab Shack is we took the top 25% of the current portfolio, identified where these restaurants are located and built a development strategy around the top 25. And if you look at the top 25% of Joe’s, that was normalizing right in that sort of $4 million range.

So we figured by replicating that, it’s safe for us to assume that we could go out and build restaurants at the $4 million AUV, and that’s what we’ve done. We’ve stuck to our plan.

Nicole Miller – Piper Jaffray

Okay. Thanks for the time.

Ray Blanchette

Sure.

Operator

Thank you. And we’ll take our next question from Jonathan Komp with Robert W. Baird.

Ray Blanchette

Hi John.

Jonathan Komp – Robert W. Baird

Hi, thank you. Good evening. Couple of questions here. So maybe I’ll start first on the Q4 results, Mike. You’re looking at the comps on a combined basis, down 3.9%. I’m guessing that’s probably worse than you had assumed. It didn’t loss but you reported from a net loss perspective with a little bit narrower than you had guided to. So could you maybe just reconcile what the differences are there?

Michael Dixon

Well, I think that the performance at Joe’s and Brick House, especially at Brick House was about where we expected it. To be quite honest, I think the performance of Q4 seems like it’s in line. I’m trying to remember, but Joe’s was crushing its comps right up until that winter storm we had in December. So we had a very strong quarter going. I think we realized the benefit from a margin side in those business as a result of that. We lost a little bit of it at the end just because of the weather in December.

Mac Grill really performed about as we thought it would perform on the top line. I mean it was negative, but when we turn off the discounting in Q3. After Q3, when we talked about, we saw what we expected more or less on the top line. But the control side, the margin management that David Catalano’s team did was a little better than we expected, which was great.

Jonathan Komp – Robert W. Baird

Okay. That’s helpful perspective. And then since you mentioned weather, can you maybe comment on the first quarter to-date, and I know you said Joe’s and Mac Grill both tracking comps down mid to high single-digits. Do you have any estimate maybe how much weather has impacted those numbers so far?

Michael Dixon

Our estimate is that the majority of that impact is weather related. When we kind of look at – breakdown the various elements of it, it feels an awful lot like majority of that is weather related.

Jonathan Komp – Robert W. Baird

Got it. Okay. And then for Mac Grill specifically, since you look throughout the year. I know you Mike you said, you are expecting comps to be down 2% and flat for the year. Could you maybe just talk about some of the various pieces and what makes the comp in getting back to that level, given that brand has been pretty negative for a couple of quarters here?

Ray Blanchette

Yes. Well, as Mike just mentioned, when we normalize the impact of weather, you’re really kind of within shouting distance now. We feel like we’ve got good strong campaigns that we’re out with. We’ve got some TV benefit over the next month or so, prior to going back – we won’t roll TV until from May of this year. So we feel like this could be – if the snow ever stops flying and the weather gets back to normal, we feel like this is a good opportunity for us to start to really see some movement in that business.

So like I said, when we see normal sales that are not affected by weather, we’re seeing something that’s a very different story than what we’re clearly reporting out on right now.

Jonathan Komp – Robert W. Baird

Got it. Thanks for the color there. And then looking at the restaurant profit, guidance for the year. Mike, I think you gave some targets for the percentage on a consolidated basis. So could you maybe just disaggregate that a little bit and maybe talk about what you expect specifically for Mac Grill for the year from a restaurant profit perspective?

Michael Dixon

Well, we’ve talked in, I think on our last call that we expect Mac Grill restaurant level profit to be consistently positive by the third quarter of this year. Obviously, we were positive in the fourth quarter, we got some seasonal benefit. But I think that realistically, Mac Grills’ restaurant level profit should be somewhere probably in the 4% to 6% range for the full year. That’s our target.

And then the Joe’s and Brick House brands are fairly comfortable with what they’ve been in the past and now. So it’s 16% to 18% range.

Jonathan Komp – Robert W. Baird

Got it. Helpful color. Last one from me then, just when you look at the Joe’s development outlook for the year, you did only opened three units, a fairly modest growth rate for the year, something close to 2% for the year, which is a little bit slower than the last several years. So could you maybe just talk about balancing the desire to grow that brand faster with the short-term capital constrains that you have?

Ray Blanchette

I think we’re looking at it may be little differently. We’ve been fairly aggressive with Joe’s growth for the last couple of years. I think this is a very good opportunity for us to take the time to assess the performance of those new units, to understand the substantial honeymoon a little better than we do today. For us, slowing down is actually a benefit to the brand. I think it’s helpful to Jim Mazany, the President there to give him a greater insight into the business and to be able to really refocus his efforts as we accelerate in the outyears.

Michael Dixon

I think the other side of that is that, as we’ve talked about in this presentation and we’ve talked many times was, we have a significant portfolio in real estate that is really our primary focus, as Ray went through his criteria is to maximize value in that portfolio. And like we do want to continue to open Joe’s in the right markets, in the right opportunities, priority-wise we want to maximize the real estate and in many respects the revenue that we already control.

Ray Blanchette

Yes, when we look at enterprise value to revenue, we look at this portfolio of restaurant and say, well, there is a big opportunity for us to unlock value here, and that has to be priority number one.

Jonathan Komp – Robert W. Baird

Got it. All right. Thanks for taking all my questions.

Ray Blanchette

All right.

Operator

Thank you. (Operator Instructions) We’ll hear next from Keith Siegner with UBS.

Keith Siegner – UBS

Thanks. Good evening guys. Thinking back to about a year ago in April 2013 at Joe’s when you had the new menu come out with some significant news and products upgrades, everything from the [indiscernible] spreading larger shrimps and new lobster pasteurization, some really big product news. And today we kind of talk about a bunch of other things, but could you talk a little bit about maybe some of the product news that you might have in the works for 2014?

Ray Blanchette

Absolutely. I mean I’ll talk about the current campaign. I’m not going to talk about the next campaign in tip our hand, but what I will tell you Keith is that our investment in R&D, in leadership there under Jim Doak has really starting to bear fruit. We have solid directors in each one of our brands that are leading culinary. So we have a robust pipeline at Joe’s. We have a robust pipeline now at Macaroni Grill. And in Brick House Tavern + Tap, as you’ve been able to see and taste, the menu innovation and leadership there has done, I would say second to none in the industry.

So we feel great. Right now, we’re running our Dippin’ Crab promotion which is a fun way for us to come back to the marketplace with a signature staple item, but do it in a new, kind of fresh way. And so what we’re seeing very early on is that the guests are very interested in this product. The creative seems to be cutting through because it’s – again we’re talking about those items that were best in the world at, and we’re doing it in a way that’s unique. So yes, I think it feels very, very good about what’s happening in R&D.

Does that answer your question, Keith?

Keith Siegner – UBS

Definitely. And to kind of follow-up along those lines, it would have been – with the 100% Shore Campaign kind of settling into a groove now. Are there any other changes you’re making to that program or still pleased with the results, any different customer feedback etcetera?

Ray Blanchette

Yes, I mean it feels right. It felt right from the first time we saw the campaign when the agencies pitched it. It feels right today. I think the longer – if anything in the longer we use the 100% Shore, probably the deeper we understand it. And so I thought the way that they – our creative team and the agency kind of leverage buckets in a unique way that had created a TV campaign. It’s 100% ownable by Joe’s. I thought the work was extremely well done. The longer we work with this campaign, I think the better we’re getting at it.

Keith Siegner – UBS

Mike, a question for you. Just wondering if you could just talk here, what’s the percent of seats at Joe’s that are out on the patios across the system? If we look out to 2Q and hopefully this cold weather and the snow is gone, we actually have really easy comparisons. It was very cold and rainy all through the second quarter up here in the Northeast last year. If you could just give us a sense, what is that percent of seats on patios? And especially in the Northeast, did they get to use the patios at all last year in 2Q?

Michael Dixon

Well, the first part of your question, we got about 30%, 35% of our seats on patio. Obviously that’s a bit part of the Joe’s business. For the second quarter, I’m trying to remember the Northeast specifically. We posted positive comps for the quarter as a system, so while it might be a little bit easier in certain areas as a system overall, we were up in the quarter.

Keith Siegner – UBS

Okay.

Ray Blanchette

Yes, I think – and the answer, Keith, I think it’s less about the capacity that opens up. I mean certainly that helps on Friday and Saturday nights sometimes, but with this being a lower indexing period. I think the reason we see the seasonality or the variability that we do with regards to weather, it’s the way our restaurant look, right. When you look at it from the street, you see a giant patio, you see picnic tables and you really are seeing – were built for people to think summer, think warm, sit outside, eat crab, drink beer. I mean that’s how we design it.

So I think that’s why when it’s freezing cold outside, we probably see a little more volatility than others, but the good news is when it’s really nice outside, we see the benefit.

Keith Siegner – UBS

Perfect. Perfect. All right, that makes sense. Thank you very much guys.

Ray Blanchette

Thanks Keith.

Operator

We’ll take our next question from Chris O’Cull with KeyBanc.

Chris O’Cull – KeyBanc

Thanks. Good afternoon.

Ray Blanchette

Good afternoon.

Chris O’Cull – KeyBanc

Ray, just as a follow-up to your comments about recent Mac Grill sales performance excluding weather. It sounds like you are implying that a negative 9% that was in the fourth quarter, is obviously improved to maybe even slightly negative if you exclude the weather here in the first. And I guess my question is what’s changed for the brand from the fourth quarter? I know there is a new ad campaign, but are there any other changes that would have called such an improvement?

Ray Blanchette

Well, I think you are seeing gradual progress, move towards positive territory, I mean that’s – we’ve been very deliberate in our actions. We’re trying to find our voice. We now believe with the gentlemen that we’re using as spokesman for the brand that we’re – our creative seems to be getting tighter and cutting through in a unique way. So I think as we start talking differently about Macaroni Grill in highlighting the unique, I guess just the uniqueness of the business itself and the experience. So we think that’s helping and we’re creating some momentum in the business.

When we see no weather – I mean we see a significant difference than what’s happening when there is weather.

Chris O’Cull – KeyBanc

Great. Mike, how much of the macro margin improvement during the fourth quarter related to less labor costs or better labor margins?

Michael Dixon

That was a component of it. I mean I think it really – obviously, we didn’t make it up on AUVs, so really it was the variable cost control. I mean we have great control around food costs and we have significant improvement in our labor. So I think the majority of the improvement comes from labor control, but we saw some in the COGS as well.

Ray Blanchette

Let me add some color there, Chris, and sort of kudos to our purchasing team. We were able to change broadline distributors within the first four months of owning the business. I mean it was sort of in record time. So great partnership with PFG, whose is our broadliner that was able to absorb an acquisition of this size that quickly and get us to a place where we were managing our entire APL. And so if you look at the migration – to moving COGS from what was happening in the summer as we’re in full integration into what happened in the fourth quarter, I mean we really started to see the significant benefit of the synergies associated with this acquisition.

Chris O’Cull – KeyBanc

Okay, great. And then, Mike, did you say that $3.9 million loss at Mac Grill included the $1.1 million in asset impairment?

Michael Dixon

Yes, it did.

Chris O’Cull – KeyBanc

Okay. So it would be have loss, great. And then could you give little more color in terms of Joe’s margin performance year-over-year. I couldn’t hear how much of it was related to the seasonality or the shift in the 13-week versus 12-week last year comparison?

Michael Dixon

I think Chris, the bulk of it is shifted – is result of the 16-week versus 13 weeks. As a result of that three week difference, we lost three higher volume sales weeks out of sort of that September time period, which really impacted the performance from a margin perspective for the quarter. So I think the bulk of that movement is a result of the quarter shift from 16 to 13 weeks.

Chris O’Cull – KeyBanc

Great. Thanks guys.

Operator

Thank you. And we’ll take a follow-up question from Keith Siegner with UBS.

Keith Siegner – UBS

Thank you. Just a quick question on the inflation outlook for this year, and just kind of what you’re seeing across the broader portfolio in the three brands? And even though it’s not quite as meaningful as it was before you bought Mac Grill. Could you just talk a little bit about what’s going on now with the broader crab conflicts in terms of costs? Thanks.

Ray Blanchette

Well, cost-wise, shrimp is obviously the biggest issue that’s sort of – it’s an industry-wide issue. But I think it adds up to the total of about 5% of our spend, right?

Michael Dixon

That’s right.

Ray Blanchette

In total COGS. We may have an issue with Dungeness crab at some point.

Michael Dixon

That’s a supply issue not a price issue.

Ray Blanchette

Not price but supply, which quite honestly running low or running out of a product when you’re in a seafood concept is kind of a good idea, right. I mean it just reinforces the freshness component, the fact that these are wildcard products and you have a lot of great options for people to trade to. So we’re not at all concerned about what happened in that event, in the event that they don’t find the crabs. Good news is these are again sustained managed fisheries that have produced consistent yields for years. So we’re not concerned about any big movement in crab or lobster. It seems fairly stable at this point.

Keith Siegner – UBS

Okay, thanks.

Operator

And it appears there are no further questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks.

Ray Blanchette

Well, I’d just like to say thanks again for joining us. As you see we’re attacking our work with enthusiasm. We remain very excited about the prospects for all of our brands and the opportunity they provide to add shareholder value over time. Look forward to speaking with everyone again in the near future. Thank you.

Michael Dixon

Thank you.

Operator

And this does again conclude today’s Ignite Restaurant Group Fourth Quarter 2013 Earnings Conference Call. We thank you again for your participation.

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Source: Ignite Restaurant Group's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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